China’s Financial System: Red Mist

FROM being a rounding error a decade ago, the financial clout of China now trails only that of America. By market capitalisation, it has three of the four largest banks, the two largest insurance companies, the second-largest stockmarket and a lengthening list of investment funds. Yet who makes the decisions in China is barely understood. The government and the Communist Party are intimately entwined with the managers of China’s financial institutions. Working out who is really in charge is almost impossible.

Even attempting to do so takes you into sensitive territory. Disclosing information about how the Chinese government works risks violating nebulous secrecy laws or sacrificing business opportunities. Many China-watchers will only speak face to face, concerned about using e-mails or phone calls to discuss what, in the West, would be standard chatter about the status of bankers and their supervisors.

Almost all of the credit for Chinese companies is raised through its commercial banks. The country’s bank chiefs are powerful men whose careers have been meticulously managed. But none has the freedom of their peers in the West, not even those managing state-infested firms like Citigroup and RBS. Perhaps the only Western equivalents of a Chinese bank are the two American housing agencies, Fannie Mae and Freddie Mac—vast institutions with political mandates to expand credit, and protection from the consequences of their role in fostering bad debt.